On May 4th, 2020 something
wild happens to automotive stocks. The market value of Italian supercar
maker Ferrari soared to 30 billion dollars above those of
all three major U.S. automakers, General Motors, Ford and
Fiat Chrysler, which was once Ferrari's parent company compared
with those three giants. Ferrari is a tiny carmaker. It has long been known for limiting
production and makes just about 10000 units per year. Compare that with
General Motors, which sold nearly eight million cars, trucks and SUV
cars in twenty nineteen. While Ferrari is a small company. It is a huge name. One of the most famous and
admired in the automotive world. In late May, a 2003 Ferrari Enzo
fetched two point six million dollars on an online auction, making it the most
valuable car sold in a dedicated online only. Collector car
auction to date. We live in a world that's only
more and more noisy all the time. I like to say there are more
and more things going on there. More and more items
competing for your attention. And in a world like that, if you've
got a brand that can stand out, a brand that is universally recognized and can
kind of step through and rise above that noise, you've got
a very valuable brand. And Ferrari in the automotive world would
be a perfect example of one of those brands. Perhaps aside from
competitor Lamborghini, Ferrari is the name that has given Italy its
reputation for producing some of the fastest, sleekest and most eye-catching
cars on the planet. That reputation is so strong. Ferrari bets it can carry its
world class name far beyond automotive production and sell other goods to
the legions of admirers unable to afford a six or
seven figure sports car. This gamble, however, is by
no means a safe one. Stamping the Ferrari name on fashion,
merchandise and even theme parks risks diluting the brand, especially if the
famous pony emblem ends up on some less than premium products. The company has acknowledged this. Ferrari has also stumbled in Formula
One, the global racing class where elite carmakers battle each
other for worldwide recognition. Ferrari did not respond to a request in
time for the story over the long term. The car market, really the
idea of transportation itself, stands to undergo tremendous changes that could even
affect demand for exotic sports cars. As we move into a
world where we're getting increasingly electrified and potentially shifting away from
vehicle ownership towards shared mobility. Is there still a place for
a brand like Ferrari in the twenty 40s and the twenty 50s? Ferrari takes its name from founder
Enzo Ferrari, an Italian racecar driver who had been racing Alfa
Romeo cars since 1924. In 1929, Ferrari founded his own
racing team, Scuderia Ferrari, which exists to this day
based in Modena, Italy. Scuderi, a Ferrari, was at first a
team centred on racing Alfa Romeos. But about a decade later, Enzo set
up a manufacturer called out to Orville, construed Cioni and moved his
headquarters from Modena to the city of Maranello, which would
become Ferrari's legendary home. Thereafter, Ferrari was a car company that
wanted to race, and Enzo Ferrari realized he had to sell a few cars
to regular consumers so he could fund his racing program. That was literally
the mantra and the vibe that started Ferrari. That was what the
owner wanted to achieve. Ferrari commissioned the engineer Dwar Keno
Colombo, to build him a totally new car in 1945. Ferrari's first racing car was the one
twenty five s made in nineteen forty seven. It came with a
12 cylinder engine, something frequently seen on Ferrari's. Later, a street vehicle
called the 166 Integra came. A year later, Ferrari started competing
in Formula One, the elite global racing series in 1950 and won its
first world title two years later. Racing has always been at the
heart of the Ferrari brand Scuderia. Ferrari is the oldest Formula One team
and has also participated in famous races such as the endurance races
at Le Monde, France and Daytona, Florida, continuously. It's the only brand that has been
continuously part of Formula One racing from 1950 onwards when a
world championship was established. And they've also been involved in
a lot of other motor sports. Unlike other brands, they've always tried
to keep it relatively pure heel sports and grand touring cars. Being a small manufacturer of highly specialized
cars is never an easy path to travel. Many such automakers
have either formed partnerships with larger companies or
been acquired entirely. Ferrari was no different. The Italian automaker Fiat took a 50
percent stake in the company in 1969 and increased its stake to
90 percent in 1988. Enzo Ferrari son Pietro owned
the other 10 percent. And in 2016, Fiat, which had since
become Fiat Chrysler, spun Ferrari out into a separate, publicly traded company,
trading under the ticker symbol race. Ferrari is obviously best
known for its cars. But the company has expanded the reach
of the Ferrari brand beyond these small, rarefied world of racing
fans and lovers of supercars. The late Sergio Marchione, the larger than
life CEO of Fiat Chrysler, who also served as Ferrari's chairman and CEO
until his death in 2018, had said in 2014 that he thought Ferrari
had a future that went far beyond driving. I actually think cars are
almost incidental to Ferrari, Marchione said prior to the
company's initial public offering. It sounds sacrilegious, but it is truly
a luxury brand up to its IPO. Marchione maintained Ferrari was worth at
least 10 billion euros, around 11 billion dollars, according to
May 2020 exchange rates. Some analysts thought that number sounded a
bit high, with at least one valuing the company at
roughly half that. But if market capitalization is any
indicator, the company is worth about three times that just
a few years later. Its revenues have not
tripled in that time. Rather, the company and investors have
been betting that brand recognition is an underexploited asset. At Ferrari, the Ferrari name and the
famous yellow and black prancing horse logo are recognized the world over brand
finance, a firm that measures the impact of various brands, considers Ferrari
to be the most powerful brand in the world. Its fame either rivals
or exceeds that of not only other global luxury symbols such as Rolex and
Air May, but also the brand power of massive information technology and
entertainment names such as Disney and Google and even purveyors of
seemingly ubiquitous products such as Coca-Cola. This is especially striking
when one considers Ferrari sells about 10000 cars per year. When Coca-Cola says it hands out one
point nine billion servings of one of its drinks every day. They've been quite cautious about what
they're doing, but the kind of primary. Primary thing that they've been
really focused on is making sure that their models are really strong
and they maintain their reputation for just for excellence in motor
cars while not devaluing or reducing the strength of that brand. So Ferrari is looking for new
ways to leverage that brand power. The company said it plans for branded
goods to contribute 10 percent of earnings before interest and tax
within the next decade. This includes merchandise such as
clothing, coffee mugs and watches. The company operates its own stores
and sells goods online through the years. Ferrari has stamped its logo
on an array of products, including some very offbeat ones like Acer,
laptop computers and mahjong sets. There is also a Ferrari world theme
park in Abu Dhabi, complete with roller coasters. But there is definitely an
opportunity to make a lot of money from their brand. I mean, if
if it's closely connected to their brand and their experience, like in the
case of the theme park, then that's probably good, because you can
you can maintain the connection and the maintain sort of how the brand
is perceived and seen to customers. And you have quite a
lot of control over that. Of course, there are risks to this. The company acknowledged in filings that
its attempts to reach more customers through merchandising could
lead to some missteps. Branding is a tricky business. Part of what gives Ferrari
its brand identity is exclusivity. The ten thousand one hundred thirty one
cars it sold in twenty nineteen came after the company decided to lift
its once strict production limit of 7000 cars per year. Waiting lists for Ferrari
cars can be long. Buyers can wait four to five
years for delivery of most customized Ferraris. The company is also known for
being very picky about who it will even sell some of its
limited edition vehicles to. Late racing legend and devoted Ferrari
collector Preston Henn, who passed away in 2017. Had sued Ferrari, alleging that the company
refused to sell him a Ferrari. Appeared to Hend had gone to
great lengths to get the car. Even Mei-Ling million dollar
check to Sergio Marchione. The check was returned. Hend slapped Ferrari with a defamation
suit, which he later dropped. Then he bought an accurate NSX,
a supercar from Honda's premium brand, which he said was
better than a Ferrari. Anyway, the company has at times
seemed even aggressive in controlling what its cars are associated with. In twenty nineteen, German fashion
designer Philip Plein reportedly received a letter from lawyers
representing the automaker complaining about pictures on
his Instagram account. The lawyers considered persay distasteful,
including pictures of shoes on the car and other photos. The letter said, tarnished
the brand's image. The letter demanded Plein remove
the pictures within 48 hours. The pictures and the image of the
letter, which Flynn also posted, were later removed. It remains to be seen
whether the company will be able to police the use of Ferrari
baseball caps and key chains. But these efforts can fit Ferrari's
Lux brand image in twenty nineteen. It formed a partnership with high
end Italian clothier Giorgio Armani. For example. The company has cut
back on its number of licensing partnerships and reduced the
number of licensed products. When you start merchandising into
lots of different product categories about which you don't really know the
details about how you don't know how to maintain quality, it starts
to get more difficult. Which is why I think they they
have reduced the number of agreements that they've they've got in terms of
licensing by 50 percent and they've reduced the number of
categories by 30 percent. Apart from preserving its exclusive
brand image, the automaker takes seriously the need to prove its
engineering prowess and capability on the racetrack. Scuderia Ferrari has a
remarkably successful overall record in Formula One. But Ferrari noted in its
20 19 annual report that the team had struggled that year. Sponsorship brings in about 14 percent
of Ferrari's net revenue, but its reputation as a winner on the track is
difficult to put a price on speed, as at the very
heart of Ferrari's identity. One of its most famous vehicles is
referred to as the super fast. Racing is also very important
for Ferrari research and development. Many of the innovations that begin life
on the track eventually make their way into Ferrari's street vehicles. And unlike a lot of other brands that
have had that, you know, that race on Sunday, sell on Monday kind of
philosophy, you know, with Ferrari, there's actually been a lot of technology that
has filtered down from the race cars into the production cars, you know,
when they first went from manual transmissions to semi
automatic transmissions. That was technology that they took
directly from their Formula One race cars. Ferrari has said it intends to take
steps to win on the track again, and despite its branding and merchandising
efforts, it remains focused on building cars. Ferrari unveiled a
record five models in 2019. Among these. The company introduced its
first production plug in hybrid. You know, the Ferrari history is still
what's most fascinating to me and the history that that that brand
stands for and the things that accomplished. And, you know, you can't
live in the past forever. So Ferrari, of course, has to look
forward to can't just always look back. Electrification is a trend. Many in the automotive industry are
at least ambivalent about an often divided among themselves over
on the one hand. Many see it as an inevitable
and welcome development that reduces pollution while delivering in many
ways comparable or even superior performance. But part of owning a supercar,
say some, is the experience of driving one. And the distinctive engine
note produced by high end engines is part of that experience. Some also argue that cars stand
to lose some of their distinctive performance characteristics. There are tremendous differences in
performance among various types of engines. But some argue electric
motors are vulnerable to commodification. Well, I mean, one of their most
distinctive things is that the kind of ruler of the engine, the engine
is what's driving that brand. At the time. But really, when you're
really producing 10000 cores and it's pretty likely that some people are going
to be able to drive petrol cores probably forever, you know, maybe you
don't need to move into those different areas. However, going after high
end customers was precisely how Tesla built its reputation. Whereas previous attempts at electric
and hybrid vehicles stressed their eco friendliness, Tesla's roadster and later
Model S and X models emphasized luxury and
lightning fast acceleration. When Tesla debuted its Model S performance
sedan in 2016, CEO Elon Musk boasted there were only a few other cars
that could beat the Model S S's zero to 60 time of 2.5 seconds. One was the Porsche 918 Spyder and
the other was, well, the Ferrari le Ferrari. Ferrari is also working on
a sport utility vehicle codenamed the Puto Gay literally
pureblood or thoroughbred. The coronavirus pandemic's stands to
severely threaten the automotive market around the world. But the high
end market is, for better or worse, just not the same as
the rest of the market. Investors appear to be betting that
companies like Ferrari, which cater exclusively to the wealthy, might be
a bit better protected from an economic downturn, always produce at least
one fewer vehicle than there is demand. Making sure that they're
not overproducing matching production to demand so that they can keep their prices
up so they don't have to cut their prices. They don't have to
put incentives on their vehicles and managing that so that they and managing
their costs at the same time to maintain their margins. Ferrari's margins don't hurt either. Some analysts indicate Ferrari makes an
average of about 80 thousand dollars of profit on each car it sells
based on the prices of the cars and its annual production volume. That is enough cash to buy a
high end Mercedes, BMW or Porsche. Its margins are healthy around 24
percent, compared with about five percent for most other automakers. In 2020, the company raised its
dividend 10 percent over the previous year. However, it is not bulletproof. Ferrari said in its May earnings
announcement that it was lowering guidance on net revenue to between
three point seven billion and three point nine billion, down
from 4.5 billion previously. It cut its forecast for
adjusted earnings before interest, taxes, depreciation and amortization to a top
range of one point three one billion dollars from a top range of
one point five six billion dollars. CEO Lewis Camilleri told investors on a
call that the company had seen orders canceled in the
USA and Australia. But so far, there were no red flags. Still, Ferrari's performance beat
expectations and encouraged investors faced with an
unprecedented economic situation. What Ferrari makes is not essential. It isn't toilet paper, soap or food. But Ferrari does have a world
class brand built over generations. It also has a product. Devoted fans will wait for four years,
pay millions and even file lawsuits to own. That might be, in
its way, a very safe bet.
